Friday, July 2, 2010

June jobs numbers were somewhat disappointing. They are notoriously volatile, of course, so you can't read too much into one month's numbers. According to the establishment survey, the private sector created 83K jobs, but according to the household survey (which I think does a better job at picking up new jobs in the early stages of a recovery), 322K jobs were lost. Looking at the trend in both, using Dec. '09 as the low, the two surveys show a total of between 600K (establishment) and 1 million (household) jobs have been created in the private sector this year. The truth probably lies somewhere in between; jobs probably are up this year at an annualized pace of about 1.5%, and that's not very impressive. In good times, jobs rise 2-3% per year.

So this is a sub-par recovery so far (and that's old news), but it is a recovery and there are no signs in the data that I can see that suggest the economy is rolling over.

Why oh why did I think that Polyanna living in a Californian seaside paradise would be the right person to guide me through this global turmoil ?

He produces pretty charts every day and from the comfort of his luxury home office conveniently imagines that fear, uncertainty and doubt are all as trivial as they appear from atop Mount Pleasant.

There is MAYHEM out there Scott, people who will never have the kind of job opportunity that you had. And now their hard-earned savings are being eaten up because yet another self-styled economist got it wrong.

As I said, you flatter yourself when you say that your opinions might be worthless.

Recovery has been torpid of late. The Fed needs to move aggressively towards qualitative easing (bigtime), and the US government needs to get out of Iraqistan, and whack federal spending by 15 percent across the board, and cut employer payroll taxes.

I would rather endure an inflationary boom than a perma-recession.

Oddly enough, back in the Reagan era, you had George Gilder (Wealth and Poverty) rhapsodizing about inflationary booms, and the need for fiscal tax cuts and Volcker to ease up.

The Reaganites did edge Volcker out, and installed Greenspan, and they ran fiscal red ink and easy money and we had a boom--while inflation came down.

Benjamin: I think you make an important mistake. The reason for the tepid recovery is not a shortage of money or interest rates that are too high. The main problem can be found in Washington: bad policies, too much spending, anti-business sentiment, too many regulations, and the threat of higher taxes.

Moreover, the Fed has no ability to create growth with the printing press. Too much money just creates higher prices, never a bigger economy.

Scott, I suspect that we are going to see declines in public employment and spending -- I doubt that can stop such cuts from happening at this point. My personal concern and fear is that declines in public employment and spending will fail to translate into prosperity for the victims of our nation's economic restructuring. What may be happening at this point is simply a brutal and savage reduction in the standards of living for a significant percentage of our population with no concomitant gains for anyone. I sincerely hope that my fears are unjustified. In the mean time, my own assessment of the employment situation is linked below:

Rob: If you relied solely on something you read on the internet to make your investing decisions then, quite frankly, you are a fool. You need to do your own research and reach your own judgments. And, if you are not competent to do this, and this appears to be the case, you should put your money in a savings account or CDs or something. Dont try to lay the blame on Scott for your failures in attempting to time the market and becoming over-leveraged.

Scott may or may not choose to reply but IMO if you are judging your investments over a two week period you are in need of some serious investment counseling. Seriously. Find someone who is experienced in the markets that you think you can work with and be guided by him/her. Don't get your investment ideas from a blog.

One other thing. If you EVER have hopes of being successful in investing you need to grow up and take responsibility for your actions. Slinging blame for (apparant) mistakes just shows your immaturity.

I might add that one can NEVER know what is going to happen in the market. You should always invest with the expectation that you will immediately lose 10% of your money, and you should size your investment so that even if you are really wrong your losses (which might be up to 50%) will not leave you bankrupt. 10% fluctuations in the market, such as we've had recently, are to be expected. That's the nature of the beast.

I promise not to blame anyone if they're wrong, but any guess as to how the market will react to earning season coming up? Do you think companies will be forced to be a bit on the pessimistic side forecasting 3rd quarter earnings even if 2nd quarter looks strong?

Maybe this is not important but looking at the chart, the recession of 2001 looks to have ended in very late 2001. However it appears to me the establishment survey did not turn positive until well into 2003, more than 18 months after the recession ended, and if fact continued to decline during much of that time. Both surveys look to have increased earlier coming out of the latest recession.

Maybe I'm missing something here but it looks to me like its not unusual for employment to build slowly at first and then increase more rapidly as the recovery improves over time.

John: you are basically right, but the recent recession was a very deep one, and usually jobs and the economy bounce back rather strongly in the wake of deep recessions (the deeper the recession, the stronger the recovery). The 2001 recession was the mildest on record, and so the recovery was also very mild. I recall that even in mid-2003 people were moaning that we were in a jobless recovery that would never be meaningful.

This is just me, but I think they have been doing that all along. Why set the bar high? Leave it low enough so that the odds are good you easily clear it.

Just my cheap opinion but against a backdrop of massive pessimism among market participants I would think earnings season would play well. Most of these executives have seen their stocks sold down hard on what has to be (to them) dubious reasoning. Many companies are enjoying robust sales and earnings and see little evidence of the 'double dip' bearish pundits are hawking. Yet short sellers and freightened investors have relentlessly sold their company's shares. Since insiders are prohibited from commenting on their businesses outside of certain time frames I would think they would welcome an opportunity to give investors a more factual set of data points than they have been getting from 'analysts', 'strategists', and other talking heads on CNBC.

Personally, I can't wait for these guys to start singing. I believe the song will be a much different one than we've been hearing.

Thanks. I, too recall the accusations of 'jobless recovery' hurled at the Bush administration during those years. Now the shoe is on the other foot and these guys apparantly don't have any better ideas either.

I saw an unemployment chart the other day that showed that the unemployment rate stayed pretty high through 1983, despite the growth spurt following the '81-82 recession. I do think it takes a long time for the hiring to pick up after a recession is over based on the data I've seen. I even recall folks saying that Reagan's chances for re-election in '84 were slim (as late as early '84) based on the "jobless recovery." (Not that I want to give Democrats hope for Obama!)

In my experience recessions are rarely predicted in advance, and recoveries are never obvious until well after the fact, with most people moaning and groaning for a year or two or even more after a recovery has started. This time doesn't look much different. We're one year into the recovery and the majority of people appear to be expecting a relapse.

I recommend you take a gander at Money Illusion blog. Written by an (usually) inflation-hawk, Scott Sumner (all good econmists are named Scott) calls for targeting nominal GDP growth. Qualitative easing (the creation of money ex nihilo) is not something you do every day, but then again this is the worst recession since the 1930s.

And it is a depression in domestic property markets. When one in 11 commercial real estate loans is sour (meaning a higher fraction of recent loans), I think we can fairly say we are in unusual circumstances, and unusual policies are needed

Inflation would be a good thing in property markets. Property markets are just crushed by deflation, but that is what has happened.

Additionally, there is no general inflation to speak of, and the bond markets (which can be wrong) says there will be no inflation to speak of. Personally, I think we are flat-lining on prices, while the BLS says unit labor costs are actually going down.

I am also not thrilled with any anti-business talk from any leader, or useless overseas and fantastically expensive wars (financed by debt) to prop up narco-Islamic states, or heavy-handed regulations.

Still, I think now the problem is largely monetary. Our financial system took a huge whack from sour residential and commercial real estate loans, and then that has repercussions through the economy to other loans. Add on to that the problems cited by Redleaf/Vigilante, of clueless program trading, leverage, and loan portfolios that owners do not understand. Really, our financial system is a house of cards.

We need to shoot a foundation into the house of cards, and I apologize for terrible metaphors, but we need qualitative easing bigtime.

In regards to listening to a blogger on how to invest: If you would have been taking Scott advice since late 2008 early 2009, you would have made a fortune. Rob, maybe you're a couple years too late? hmm....good luck.

Well, no one asked, but here is my review of "Panic," by Redleaf/Vigilante:

Redleaf and Vigilante (a Christian activist, no less) write a succinct, easy-to-understand book on the recent U.S, financial debacle-collapse. Yet, in the end, what policies do they stand by? It is not clear, especially in a world dominated by program trading, leverage, and extremely convoluted financial products.

Additionally, the book is marked by hubris--in the Redleaf/Vigilante world, only hedge fund traders are smart, while everyone else--the government, Wall Street, media-- is populated by "poseurs," stupid or craven. This theme gets repeated too often in the book.

Redleaf/Vigilante savage the Bush Administration for crony capitalism, and say administration bungling and self-dealing cronyism led to the financial collapse--yet they also say the government did the right thing is bailing out Bear Stearns counterparties, but then failed when they did not do the same thing for those of Lehman Bros. They even suggest the government should move aggressively to shutter financial institutions showing weakness. In short, the government should have bailed out everybody equally and quickly. Well, I guess that is a policy, but it is not small government, that is for sure, and as to moral hazard.....

Back to Wall Street, the authors point to equity futures markets as highly destabilizing, especially when twinned with mindless and explosive volumes of program trading. Yet no policy options are raised. They also lambast our public markets for creating a very weak ownership class, known as chumps or shareholders. I happen to agree that shareholders are far too weak, and need the ability to elect their own boards readily, including the chairman of the board. The SEC is sandbagging that very idea right now.

Along the way, Redleaf/Vigilante bash efficient market theory as a pipe-dream, perpetrated and lionized by ivory-tower clowns.

Redleaf/Vigilante also deride buyers of CMBS and RMBS, who own financial products they do not understand (rating agencies did not understand such products either and they were rated AAA). The creation of the private CMBS and RMBS markets was often cited as a triumph of financial free markets and innovation. Yet, the "owners" were clueless idiots, as no one really understood what was in a CDO, RMBS, or CMBS, once credit and economic conditions deteriorated. Again, what to do? No answers from Redleaf/Vigilante, just tongue-lashings.

Oddly, after spending several pages deriding the CRA, Fannie and Freddie, and darkly raising the usual right-wing hints about inner-city people looting taxpayers, Redleaf and Vigilante then state (on page 140), "Nevertheless, the mortgage crisis was not caused by poor people. The poor do not have enough money to bring down the U.S. banking system. Rather, once the reduction of standards (in mortgage underwriting) for the poor became a political imperative, inevitably the bankers extended the new, lower standards to higher-income borrowers."

What? You are a banker under pressure to lend into a low-income zip code, so you then lower your standards for Beverly Hills too? Really? And you blame Uncle Sam for that? Redleaf/Vigilante do. Maybe they are just throwing some meat to the right-wing.

Later we find out that "flippers" came to make up one-quarter of homebuyers--again, not poor people. Flippers walk, when the going gets tough, especially if they bought with nothing to 5 percent down. Banks were being forced to lend to flippers by no one--save perhaps their internal loan goals.

In the end, the book is a mish-mash of brilliant insights, clear writing, platitudes, and heavy hubris--but a lack of explicit policy suggestions. I, for one, think that the creation of a rock-solid financial system, even at the loss of some innovation, would be a worthy goal. How to do it? I never want to see our financial system collapse again, and I think that is a defensible policy goal. How do we get there?

In one odd aside, Redleaf/Vigilante say that Iraqi oil fields should be given to Iraqi citizens, who will get the profits, meaning such fields should not be privatized. They even suggest a single oil company should do the job, owned by Iraqis. How to explain this strange mixing of signals? This lack of clarity extends throughout the book.

Only Reagan, Clinton and Redleaf are left standing in this book, along with the soft notion we need an ownership society of real owners--people who actively own their companies, and financial products. Okay, how to do that in the modern world? Wipe out public markets?

We have had a seemingly endless supply of bad news the last few weeks. Maybe a couple of good things should be pointed out. Good news doesn't sell so it is usually downplayed.

1. Spain raised several billion in five year notes in the bond market last week at a very narrow spread to bunds. We have certainly been told over and over how bad things are getting there. Maybe not? This is another data point that says Europe's fiscal problems will be managed.

2. An ECB note came due this past week for EU banks. It was for something like EU400 billion. The banks only rolled HALF of it. Not what one would expect from collapsing banks. Maybe they aren't as desperate as we were constantly being told last month.

3. The Euro had a good week. It was up very nicely vs the buck. Last month we were being told it was going to parity before it would be doomed as a currency. Now maybe this is just a bounce but it looks to me like the wrong way for a doomed currency to act.

4. Gene Epstein is an economist and longtime columnist for Barrons. It would not surprise me if he was an aquaintance of Scott's. This week, for the second week in a row he has catagoricly stated there is no evidence of a 'double dip' recession developing in the near future (few months I assume). Can he be wrong? Of course he can. But he has a reputation and is widely read. He would not twice in as many weeks make such a claim if he were unsure of his data. Scott is not the only economist that sees an economy continuing to expand.

Last night I watched a movie that has been around for awhile. It was Roman Polanski's "The Pianist". Many of you have probably seen it. It chronicals the WW2 experiences in Warsaw, Poland of famed pianist Wladyslaw Szpilman. Throughout the movie I was reminded of the utter destruction war has brought to a continent of great civilization. Perhaps we here in America underestimate the determination in Europe to prevent such devastation from ever occuring again. A common currency is a huge step in such a prevention. It will not quickly or easily be undermined. We should not underestimate the powerful political forces throughout Europe that will defend it. Glib predictions of its demise should be questioned by reasonable people. Perhaps other agendas are at work?

I do not deny that most developed economies have structural debt issues. Nor do I believe the global banking system is in pristene condition. However just because there are problems does not mean economic growth cannot occur or that equity markets cannot go up, as you imply. There are many economies around the world that do not have large deficits, have good economic growth, sound banking systems, and falling unemployment. Many large US corporations have good businesses in these economies and are rapidly expanding in them. Those who doubt this should listen to the conference calls of Intel, Exxon, Hewlett Packard, Qualcomm, Proctor and Gamble, Boeing, IBM, etc. Furthermore, the balance sheets of many of these companies are the strongest they have been in decades. No insolvency problems at Microsoft, Apple, or Cisco. Yet the stocks have been sold down to levels that are cheap.. and even cheaper if the large amounts of net cash is subtracted from the share price. IMO the global economy would need to go into a recession for these prices to look expensive. I have seen no hard evidence of such. There have been many negative opinions laced with ominous, catchy phrases designed to instill fear in those who read or listen, but little hard evidence of global or even US recession in the near future.

I believe the selloff in equities over the last eight weeks has created good and in some cases, deep value in many securities. A measure of this value is the earnings yield on the S&P 500 (the inverse of the P-E ratio) minus the yield on the ten year US treasury bond. If we use $83 for the S&P earnings for 2010 divided by the price of 1020 we get 8%. Subtract 3% on the 10yr nets a 5% spread. The last time the gap was this wide was the 1970s. I submit there is value in this market at these levels.

Again, I do not dispute that there are problems. But those problems are reflected in the yield on treasury bonds and in the selloff in equities by fearful people. Unless these problems get significantly worse in the near term will they soon cease to have an effect on securities prices. Old news does not move markets.

Very soon earnings season will be upon us and we will hear from the people that see the economy up close and have access to very accurate data concerning demand. These people have been effectively muzzeled by securities laws concerning what they are seeing. Very soon they will have their say. This information is NOT reflected in share prices, UNLESS the news is bad.

Soon the deep market correction of the last eight weeks will end. Markets do not move in one direction forever. No one is blessed with clairvoyance concerning share prices so we do not know with certainty when or at what level this will happen, only that it will. IMO investors should remain patient and if you can, do some homework and cherry pick within the universe of high quality companies whose share prices are in the bargain bin. They will not be there forever.

Scott:There are massive road bldg. projects that have begun in the Chicago area. I am not sure whether these prjects are necessary but my guess they were stimulus money putting people to work.Hooray the unemployed could now be getting paychecks. For 2 months they have torn roads apart causing inconvience to drivers and business. Now for the last week I notice all the heavy macinery is just parked with work coming to a halt. I wondered, the weather has been good, whats up? Now I read in the Chicago Tribune on Friday that these worker have gone on STRIKE. So much for the idea of providing paychecks. Do these people now get unemployment checks, foreclosure bailouts, credit card bailouts, etc. With 10% unemployment, if the pols. would do the right thing they would allow the construction companies to put out a call for anyone needing a paycheck.I believe the US could be on the track of becoming a third world country, being led by our politicians. Sorry for these feelings on the 4th.

Family Man: re 10-yr @ 3%. I'm convinced that 3% yields or less on 10-yr Treasuries is a very strong signal that the market is pricing in either a sharp slowdown or a modest recession. The very high earnings yield on equities is another sign of the same. This market is very pessimistic. If the economy grows only modestly we should see higher prices one equities and higher yields on Treasuries.

John-I am hoping, hoping every day for a full-fledged economic recovery, but there are signs of sputtering.I fall into the camp of observers who think more should be done.

I am not enamored of federal spending, any federal spending. I think we get about 10 cents on the dollar in value from domestic federal spending, and and even lower result from offshore spending.

So, that throws me into the monetarist camp. On monetarism, I think we can be very active and aggressive now. Inflation is dead, dead, dead.

There is a nice website, written by inflation-hawk conservative Scott Sumner (Money Illusion) who says now is the time to go to qualitative easing, or ex nihilo money creation. I agree.

If you are looking for a job, you are still in the worst recession since the Great Depression, and if you invested in real estate, you are still in a depression. We need serious reflation in property markets quickly.

Lenders and investors will benefit--and many of those investors are small businesses who often tap equity ti finance business expansion.

Yes, we should rein in Obama too, but for now, monetarism is the way to go.

About two-thirds of the new household survey jobs occurred in January and February. Since March, only about 475,000 more people report themselves as employed. The decline in the June labor force number suggests to me that most of the temporary census hires came from persons not actively looking for work. Instead, they came from marginally attached people who came into the labor force for the temporary census jobs and are now exiting the labor force as their jobs expire.

I agree that more stimulus spending from Washington would be a bad mistake. I suspect a lot of the 'double dip' fear is perpetrated by those clamoring for another large 'lets spread the wealth' campaign. One prominent (but I believe misguided) economist has recently predicted an economic depression because politicians are not borrowing and spending even more, as he has advised.

The Federal Reserve is bound by law (Humphry-Hawkins) to foster full employment and low inflation. As you say inflation is dead (for the time being) so they will keep their stimulative monetary policy. I believe they see the economy continuing to expand slowly but should evidence build that it is slipping more than they wish to see, I think they will act, perhaps in the manner you suggest.

I hope you had a good holiday. I enjoyed a little tennis and had dinner with family. A very good day. God Bless America.

As soon as governments and central banks stop trying to defy gravity, the markets are not going anywhere. Wish all you want my friends, the global economy doesn't pass the sniff test right now. This is eerily similar to when US RMBS stopped making sense in 2003/04.

Btw, companies are going to need much more cash-on-hand in the next decade or two so bake that into your models. The high flying debt laden days are thoroughly in check. This will become the norm, not something to cheer about as you do right now.

BenjaminInteresting commentary on the Redleaf/ Vigilante book. What I took from the book is that which started as "How can we sell these mortgages" evolved into "How can we create more mortgages" as international institutional (and other) "investors" loaded up on what they thought was high return/ low risk RMBS. Everyone wanted to forget TANSTAAFL.So at the end, the incentive to reduce the standards for other buyers and flippers was driven by "investors" who thought they had found the financial fountain of youth - more mortgage.

I suspect a number of these institutional buyers of RMBS were pension funds (union, private, and state) who were looking for the magic return to fulfill the promises made on defined benefit plans rather than admit they were not sustainable.

I was glad to see Redleaf/ Vigilante NOT make policy suggestions. There doesn't seem to be a shortage of policy opinions these days; facts and insights are harder to come by.

Scott, your blog and the comments are must reads daily. I am grateful for what I have learned. Hope to become a more frequent commenter - if I have something to say.

"Yes, we should rein in Obama too, but for now, monetarism is the way to go."

Benji gives such short shrift to the damage his boyfriend is doing. Instead, Benji's prescription is monetary alchemy. What could go wrong?!

Add Fareed Zakaria to the ever growing group of people who find themselves somehow suprised by Obama's socialist economic policies. Alot of us figured that out years ago when people like Benji were riding the Hopeandchange bandwagon and laughing at Sarah Palin.

thought he was unusually smart. But all think he is, at his core, anti-business. When I asked for specifics, they pointed to the fact that Obama has no business executives in his Cabinet, that he rarely consults with CEOs (except for photo ops), that he has almost no private-sector experience, that he's made clear he thinks government and nonprofit work are superior to the private sector. It all added up to a profound sense of distrust.